Tuesday, 26 of September of 2017

Economics. Explained.  

Free Trade Is Not the Issue –Fair Trade Is the Problem

August 4, 2017

The U.S. trade imbalance has been maligned by many.  Some economists contend that the U.S. losses jobs when American companies build plants overseas rather than in the United States. They also believe that continuous trade deficits allow foreigners to accumulate so many dollars that they are “buying up America”.  The solution is, therefore, to slap massive tariffs on goods coming into the United States from China and Mexico (in particular) in an attempt to rein in the deficit.

But let’s be clear.  The trade deficit itself is not the problem.  Rather, it is a sign of a healthy economy.  The United States economy is growing more quickly than the rest of the world and, as a result, we are buying more goods from foreign countries than they are buying from us.  That is not a bad thing.  Furthermore, Americans are freely buying all those goods from China, Mexico, and elsewhere.  It is not some nefarious plot to undermine the economic health of the U.S.   The reality is that if Americans would choose to save more and spend less, we would not be purchasing so many goods from China, Mexico and elsewhere in the first place.  But, primarily to take advantage of lower prices, we willingly purchase imported products.  As a result, our imports grow rapidly and the trade gap widens.

Furthermore, it is hard to argue that the size of our trade deficit is costing jobs.  With the unemployment rate at 4.3% and a shortage of available workers, that contention is a little hard to swallow.

The other side of the coin is the current account surplus.  Whenever, we buy goods from other countries they accumulate dollars.  Therefore, the current account surplus is the mirror image of the trade account deficit.  Those countries then invest those dollars in U.S. assets like real estate, the stock market, or financial assets – U.S. Treasury securities in particular.  It is important to recognize that the capital stock of the U.S. is not a fixed amount to be divvied up amongst U.S. and foreign entities.  It is constantly growing.  Thus, foreign investment in the United States is a good thing.  But right now the U.S. budget deficit is so large that these foreign capital inflows are being gobbled up largely by the government sector.  If our policy makers would take action to cut government spending and shrink the budget deficit, more of these overseas funds would flow to the private sector.  Private sector investment is what boosts productivity growth and raises our standard of living.  Thus, “free trade” is a good thing.

But free trade is not the same thing as “fair trade” and that is where the problem exists.  When countries impose tariffs on goods coming into their country to protect domestic industries they are carving out an unfair advantage for themselves.  In a recent op-ed piece in the Wall Street Journal, Commerce Secretary Wilbur Ross noted that China’s tariffs are higher than those of the U.S. in 20 of 22 major categories of goods.   Europe imposes higher tariffs in 17 of 22 categories.  In the automobile industry, for example, the E.U. charges a 10% tariff on imported American cars while the U.S. imposes a mere 2.5% tariff on European cars arriving in the United States.  China slaps U.S. automakers with a 25% tariff and an even higher tariff on luxury vehicles.

The non-tariff trade barriers are even more oppressive and come in a variety of forms like daunting procedures to register imports and requirements that foreign companies build local plants.  Both the E.U. and China boost their export industries via low-cost loans to export companies, refunds of value added taxes, and below market real estate purchases.  The U.S. simply does not provide this type of assistance to its export industries.  Secretary Ross does a nice job of highlighting these tariff and non-tariff barriers to trade.

Economists generally agree that free trade is a good thing, boosts economic growth in both countries, and reduces the prices that consumers pay.  A trip to WalMart, COSTCO or Target will quickly highlight the advantage of lower prices for imported goods.  But all countries need to play with the same set of rules.  Tariff and non-tariff barriers to trade can only be characterized as “cheating”.  None of us will willingly choose to play in any game where the deck is stacked against us.  Why should our export industries be forced to do so?  Trump is right in going after those countries that have chosen to protect their domestic industries via these mechanisms.  And that is not “protectionist”.   It is simply calling out cheaters for what they are and insisting on a level playing field.

Stephen Slifer

NumberNomics

Charleston, S.C.


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